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Options Solutions 2

# Options Solutions 2 - A Price of the call will go down by...

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Old Exam Problems - Options - Solutions Page 2 of 13 Pages C d = [(.3)(\$2.336) + (.7)(\$0.000)]/[1.01] = \$0.694 C 0 = [(.3)(\$3.596) + (.7)(\$0.694)]/[1.01] = \$1.55 2. Assume that a share of stock has a current price of \$65. Also assume that a call option on this stock has 1 year to maturity and that the appropriate 1-year interest rate is 5.00%. Using the N(d) table, you can calculate that when the standard deviation of the continuously compounded annual returns is 0.23, that N(d1) will be 0.6282, N(d2) will be 0.5387, and the price of the call option will be \$7.49. Now assume that there is major change in the market, such that the annual interest rate goes up to 8.00% while the standard deviation of return goes down to 0.18, which in turn will force N(d1) up to 0.6976 and N(d2) up to 0.6322. What will be the change in the price of the call option?
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Unformatted text preview: * A. Price of the call will go down by \$0.12 B. Price of the call will remain unchanged C. Price of the call will increase by \$0.12 D. Price of the call will increase by \$0.41 E. None of the above Black-Scholes Option Pricing Stock Price \$65.00 \$65.00 Exercise Price \$65.00 \$65.00 Standard Deviation 0.2300 0.1800 Years to Maturity 1.0000 1.0000 Square Root of Years 1.0000 1.0000 Annual Interest Rate 5.00% 8.00% Periodic Interest Rate 5.00% 8.00% PV (Exercise) \$61.83 \$60.00 d1 0.3324 0.5344 N(d1) 0.6293 0.7019 d2 0.1024 0.3544 N(d2) 0.5398 0.6368 Call Price \$7.53 \$7.41 3. A stock is currently selling for \$50. The stock price could go up by 12% (u = 1.12) or fall by 6% (d = 0.94) each month. The monthly interest rate is 1% (periodic rate)....
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